NEW DELHI, June 28 (Reuters) - India should rein in its lofty coal output target as power demand is growing at a slower pace than expected, a government policy think-tank said, even as state monopoly Coal India Ltd (CIL) struggles to sell already-mined coal.

A turnaround in India's coal sector, from crippling shortages three years ago to a surplus thanks to faster government clearances, is seen as a major success for Prime Minister Narendra Modi.

The production boost means Coal India (CIL), the world's largest coal miner, is for the first time scouting for buyers abroad. But it is sticking to its plans to nearly double coal production to 1 billion tonnes a year by the end of this decade.

"A careful assessment of demand for coal-based power is needed so that the over $1 billion annual investment being made by CIL in raising its production capability is not left stranded," the NITI Aayog said in its Draft National Energy Policy released late on Tuesday. (bit.ly/2rXZmWK)

Given that power demand was only growing at 5 percent a year at present, the coal sector should respond as needed, rather than pursue a "target-led strategy", it said.

Some experts say the weaker-than-expected power demand, though growing slightly faster than previous years, is also an indication of the softness in India's $2 trillion economy, whose growth in the January-March quarter unexpectedly slipped to its lowest in more than two years.

NITI Aayog, or the policy panel, added that nearly 304 million Indians are still not connected to the grid, suggesting there was scope for demand to rise.

The panel also proposed splitting Coal India's seven units into independent companies to improve efficiency through competition. It also called for more private participation in coal mining.

"The resulting competitive pressure will foster efficiency and bring about substantial reduction in coal prices," the panel said. "It is entirely conceivable that our coal industry will emerge as an exporter of coal."

Piyush Goyal, India's power and coal minister, has repeatedly said Coal India will remain a single entity. (Reporting by Krishna N. Das; Editing by Richard Pullin)